Memeorandum

May 03, 2014

Tax Cut Denialism, With A Freudian Slip

Paul Krugman explains that he was right and Evil Righties were wrong about the response to the financial collapse of 2008. But the Times delivers a lovely correction of a Freudian slip, and Krugman continues to wear his Big Government blinders in contradiction of his own earlier analysis.

Slips first:

Correction: May 2, 2014

An earlier version of the web summary with this column pointed out that few economists saw the fiscal crisis coming. The crisis should have been referred to as a financial crisis.

It was not now, has never been and never will be a fiscal crisis! Fears that out-of-control spending will put us on the road to Argentina are soooo 2003 and subsequently sorta-kinda repudiated.

Let's switch to Krugman's ongoing tax-cut denialism of the logic of his own arguments. From the recent column:

...since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

...

In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment.

For example, many seemingly knowledgeable people — bankers, business leaders, public officials — warned that budget deficits would lead to soaring interest rates and inflation. But economists knew that such warnings, which might have made sense under normal conditions, were way off base under the conditions we actually faced. Sure enough, interest and inflation rates stayed low.

And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.

What Krugman can't bring himself to write is that cutting taxes can serve as well as increasing government spending. The gist - if the tax cuts are spent, then it represents a government funded boost to demand; if they are saved, they help repair household private sector balance sheets by substituting public for private debt.

Why is recovery from a financial crisis slow? Financial crises are preceded by credit bubbles; when those bubbles burst, many families and/or companies are left with high levels of debt, which force them to slash their spending. This slashed spending, in turn, depresses the economy as a whole.

And the usual response to recession, cutting interest rates to encourage spending, isn’t adequate. Many families simply can’t spend more, and interest rates can be cut only so far — namely, to zero but not below.

Does this mean that nothing can be done to avoid a protracted slump after a financial crisis? No, it just means that you have to do more than just cut interest rates. In particular, what the economy really needs after a financial crisis is a temporary increase in government spending, to sustain employment while the private sector repairs its balance sheet.

To be fair, Krugman resisted the notion in the quoted piece that cutting taxes could lead to balance sheet repair, so his denialism is consistent. he provided more on the private debt problem here:

Unfortunately, the economy didn’t come roaring back. Why?

The best explanation, I think, lies in the debt overhang. For the most part, even those who correctly diagnosed a housing bubble failed to notice or at least to acknowledge the importance of the sharp rise in household debt that accompanied the bubble

...

And I would argue that this debt overhang has held back spending even though financial markets are operating more or less normally again.

Oddly, when the political jockeying for the 2009 stimulus was underway, Krugman briefly favored some tax cuts. This is Jan 6, 2009:

How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.

First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.

Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more.

Whatever. I puzzled over Krugman's notion that temporary tax cuts don't spur permanent long-term demand but temporary increases in spending do back in the day. A week later I scratched my head over his insistence that putting more money in people's pockets by way of a helicopter drop (or, heaven forbid, a tax cut) could not be stimulative but extending unemployment insurance could be. And (IIRC, after some emailing to intermediaries) Krugman got pushed back to a modest endorsement of payroll tax cuts.

Left unaddressed is the mix of spending versus saving when the Feds hand out money to the states to boost demand. Krugman is confident that tax cuts to "the rich" will simply be saved rather than spent and hence provide little stimulation. But economist John Taylor of Stanford found that states and municipalities tried to save today to smooth their budget problems over the next several years:

Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers. Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view.

The money sent to the states, meanwhile, didn't really increase infrastructure spending. If a state already had a light-rail project under way, it just borrowed less and used some of the federal money instead -- you didn't see more light-rail projects.

Manipulating fungible cash amongst varied short and long term accounts is a bedrock of state and municipal finance in this country; the ideas that sending Federal money to a state (even with earmarks) will force them to spend "that money" on a project rather than re-jiggle all their other accounts so that they spend and save as they want is naive.

Every time MLB wears the Negro League unis it strikes me as a celebration of bigotry. Plus I remember seeing that obese POS Hargrove in the Cleveland Spiders or whatever gear which had a tight fitting cap that made his head look smaller and the rest of him fatter than ever.

Rush was musing how back when he was with the Kansas City Chiefs, he was told to keep politics out of the game, now it seems it's the only thing that matters, notably the Heat being on Team Trayvon for the last two years, Lebron insisting that Sterling lose his team,

the left makes it practically impossible for anyone to authentically practice their Christian faith, it grants absolution to every kind of evil doer, from the murderer in Oklahoma, to the next thug sprung from Gitmo, it is in the latter context that she spoke,

Yeah Lebron isn't exactly distinguishing himself anywhere else but on the basketball court. I don't know if it was just in this area, but they showed about 10 commercials for 404Care featuring Zo Mourning (who had a kidney transplant iirc which might be problematic under this new system of wonderfulness) for one of Lebron looking and sounding like an idiot.

Too bad the Anchoress said that; I usually like her. Not sure why she decided to joint the circular firing squad or what upside she thought there was to it but that doesn't even fit a loose definition of constructive criticism. In fact that seemed like an airing of a lot of pent up animosity.

One quibbles about some of Rupert's editorial choices, however, the Journal does still believe that there is some purpose in finding the enobling, the elevating part of culture, whereas Carlos Slim, seems to dwell in the wretched sewer a little too frequently

Ok, I'm taking a chance on this because it's a soundboard recording (when I saw him before the band was really really loud; almost to the point of getting me to leave loud). Albert Collins died of cancer about a year and a half after this was recorded (I'd really forgotten how long ago it was) but he put on a great show. He always played a telecaster afaik and used weird tunings and a capo (and always kept his hand somewhat hidden so people couldn't copy his stuff) and had a really really long guitar cord and would go outside the club to get people to come in. He was the guy leading the song on Adventures in Babysitting (an inspired choice imo) and was one of a kind. He was around for a long time and had an icy sound which he built an image around. On J Geils first album they had a version of one of his instrumentals "Sno-cone". The band warms the club up and he comes on at about the 19 minute mark.

Gag me with a spoon. Those dresses were hideous and the most appalling part is the lack of professionalism in the fits of some of them. Baba Wawa's jacket doesn't hang properly, most of the others look like Beverly Hills Wal-Mart shoppers on a Saturday evening. Spandex explosion! You don't wear a train to a sit down dinner. A dance, yes but a dinner? Gag.

Matt!!! I've said it before, I'll say it again.
In High School, Doc Rivers wife sat directly in front of me, in Chemistry class and Biology class. The old commercial. "Gee your hair smells terrific!!!" WAS CORRECT. I cannot remember ever looking her directly in the eye, EVER. I've only met Doc Rivers once, and he seemed really bright.

I used to wonder how intelligent real world peeps could not EASILY recognize a vapid vacuous ass-hat and phony, like Johnny, Lurch, Hein$z Kerry Kohn, or Hairy ScReid, or Nancy Lugosi, or Washerwoman-Schlitz and many others, including Anthony Weiner or Client 9 Elliot Spitzer. I came to understand, that the SWAMP, like tonights LIB MEDIA OBAMA-FEST, is the CULMINATION of what LIB MEDIA peeps dream of in rigid HOT TURGIDITY. The entire HUGE BANQUET HALL was filled to the overflow, with sycophantic LIBS. At least a THOUSAND PEEPS who would CLAW your eyes out, just to be SEEN and INVITED to this NERO-FEST.

The thing is, you can see the same thing on a micro level. Unfortunately, there's something in human nature that seems drawn to those kind of people.

I've seen in my various jobs, and also in my personal life, far too many people who are as dishonest, fake, vacuous and ultimately both incompetent and also vicious, but, nevertheless, otherwise smart friends and co-workers fall over themselves in praise of them, hand them promotions, etc.

And even when, inevitably, things turn to crap, they mostly escape blame and get handed a second, third, tenth chance.

I think, in general, we used to be at least a little better at spotting them and seeing them for what they are. But 50+ years of prog education and toxic pop culture have done a great job making people blind to them.

Great Pieces, Clarice. I also read your FB post from Sharyl Attkinson about whether Vietor has contradicted sworn testimony by Morrell and presser briefs by Carney. It's always a single loose thread that unwinds a sweater and a fiction.

Gowdy needs to get this committee formed and under way pronto before the coverup gets a new makeover.

Clarice,
In a nutshell your Pieces this morning have nailed it! My blood boils over the obvious contempt & deceit this administration has exhibited from Day 1. I can't understand how their supporters fail to acknowledge any of this outrage.

I will continue to get the message out that they all need to be held accountable.